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Chicago Milwaukee Corp. v. United States

April 13, 1998


Appealed from: United States Court of Federal Claims judge Gibson

Chicago Milwaukee Corporation appeals the United States Court of Federal Claims' judgment, Chicago Milwaukee Corp. v. United States, 35 Fed. Cl. 447 (1996), denying the company a tax refund. We affirm.

Before: Mayer, Chief Judge,*fn1 Rader and Bryson, Circuit Judges.

The opinion of the court was delivered by: Mayer, Chief Judge


The parties stipulate the facts. Chicago Milwaukee succeeds the Chicago, Milwaukee, St. Paul and Pacific Railroad (Railroad), a former carrier subject to the jurisdiction of the Interstate Commerce Commission. See 49 U.S.C. Section 10501 (1982). Facing insolvency in late 1977, the Railroad petitioned the United States District Court for the Northern District of Illinois to reorganize under the Bankruptcy Act of 1898. See 11 U.S.C. Section 205 (1976) (repealed 1978). The court appointed a trustee (Trustee) for the Railroad, who eventually determined that the Railroad's survival required reducing the employees' wages temporarily. On January 29, 1982, the reorganization court approved a wage reduction agreement among the Trustee (on behalf of the Railroad) and four labor organizations (on behalf of the employees). The reduction agreement reduced all employees' gross taxable earnings by seven percent from January 1, 1982, until December 31, 1984. If the Trustee could sell the Railroad's operating lines for a sufficient price, the employees affected by the reduction agreement would receive from the Railroad's estate up to the amount of the reduction. In particular, the reduction agreement provided:

In the event of the consummation of a transaction for the sale or merger of all or substantially all of the railroad lines . . . , employees who had wages reduced under this agreement . . . shall be entitled to the return of up to the amount by which wages were reduced [as determined by a formula] . . . . [But if] the total consideration does not exceed the ICC book value . . . no employee shall be entitled to the return of any amount by which wages were reduced under this agreement.

On April 6, 1984, the Trustee entered into an asset purchase agreement with the Soo Line Railroad Company and its corporate affiliate, SLRCO, Inc. (together Soo), selling substantially all of the Railroad's rail lines for $148 million plus the assumption of certain liabilities totaling over $300 million. Both parties agreed to adjust this price to account for pre-closing changes in the assets' net value. Writing that "upon consummation of the transactions contemplated by the [asset purchase agreement], all common carrier obligations of the Trustee and [the Railroad will] be assumed by Soo," the reorganization court approved the purchase agreement on February 19, 1985, when the Railroad ceased operating as a railroad. Virtually all of the Railroad's employees subsequently began working for Soo, and the Interstate Commerce Commission formally recognized on April 2, 1985, that the Railroad was "no longer operating as a common carrier railroad." However, the Railroad's estate remained liable for the possible repayment of the wage reduction.

Individuals subject to the reduction agreement received repayment of their wage reduction ultimately, but not immediately. The Trustee and Soo disagreed over the adjusted sale price, which likely delayed full repayment of the wage reduction. In the fall of 1985, the Trustee requested that Soo specify in writing the total downward adjustment it sought. Soo responded in a letter dated October 4, 1985, that it did not seek to reduce the purchase price by more than $50 million. The Trustee determined that even with a $50 million reduction, he could return at least sixty-six percent of the wage reduction. In mid-October of 1985, he paid the workers sixty-six percent of the total wage reduction. On September 12, 1986, the reorganization court approved a settlement agreement ending the dispute over the adjusted price for the Railroad's assets. CMC Real Estate, the Railroad's successor, repaid the remainder of the wage reduction later that month.

Individuals receiving the payments did not "take home" the full amount of the wage reduction. Taxes were withheld. Among those taxes was the Railroad Retirement Tax Act's employee tax, I.R.C. Section 3201 (1982 & Supp. II 1984). The Railroad Retirement Tax Act (Tax Act), id. Sections 3201-3232, is the railroad industry's analogue to the Social Security Tax Act: it imposes a payroll tax on employers and employees. Revenues from the Tax Act pay pensions and other benefits. See Railroad Retirement Act of 1974, 45 U.S.C. Section 231 (1994) (pension program); Railroad Unemployment Insurance Act, id. Sections 351-367. On October 18, 1985, the Trustee paid employer and employee Tax Act taxes to the Internal Revenue Service. He filed a corresponding tax return with the IRS for 1985 on April 17, 1986. CMC Real Estate likewise remitted the taxes to the IRS on October 3, 1986, and filed a return for 1986 on January 28, 1987.

In April of 1988, CMC Real Estate timely filed administrative claims with the IRS for the refund of the Tax Act taxes that it and the Trustee paid in 1986 and 1985, respectively. The IRS did not act on CMC Real Estate's claims. So, on July 9, 1992, Chicago Milwaukee Corp., CMC Real Estate's successor, filed this suit in the Court of Federal Claims. The court dismissed the case for lack of jurisdiction. See 29 Fed. Cl. 77 (1993); see 35 Fed. Cl. at 451-53 (summarizing procedural history). Chicago Milwaukee appealed the dismissal, which this court reversed. See 40 F.3d 373, 375 (Fed. Cir. 1994). On remand, the trial court held that the repayment of the wage reduction constituted "compensation" from an "employer" under the Tax Act; thus, it denied Chicago Milwaukee a refund. Chicago Milwaukee appeals.


Section 3221 of the Internal Revenue Code (Supp. II 1984) "imposed on every employer an excise tax . . . equal to [a] percentage of compensation paid during any calendar year by such employer for services rendered to such employer" (emphasis added). This appeal boils down to two primary issues: (1) whether the phrase "paid . . . by such employer" covers the repayment of the wage reduction and (2) whether the repayment constituted compensation. Resolving the first issue requires addressing the meaning of "employer." We review the trial court's statutory interpretation de novo. See Qantas Airways Ltd. v. United States, 62 F.3d 385, 387 (Fed. Cir. 1995). In pertinent part, employer:

means any carrier [subject to Interstate Commerce Commission jurisdiction] and any company which is directly or indirectly owned or controlled by one or more such carriers or under common control therewith, and which operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad, and any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer . . . . The term "employer" shall also include railroad associations, traffic associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies and other associations, bureaus, agencies, or organizations controlled and maintained wholly or principally by two or more employers as hereinbefore defined and engaged in the performance of services in connection with or incidental to railroad transportation.

I.R.C. Section 3231(a) (emphasis added). Congress apparently intended this definition of employer to cover "substantially all those organizations which are intimately related to the transportation of passengers or property by railroad in the United States." See S. Rep. No. 75-818, at 4 (1937). The parties do not dispute that the Trustee was an employer from January 1, 1982, until December 31, 1984, when the workers performed obligations entitling them to possible repayment of the wage reduction. The Trustee derived his employer status from the Railroad's status as a carrier. ...

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